Carrying on business in the UK and related tax, accounting and Company Law matters Tim Stovold

Agenda Kingston Smith – Introduction Branch vs Subsidiary Employment Taxes Corporation Tax VAT

Kingston Smith – Introduction

Branch vs Subsidiary

Employment Taxes

Corporation Tax

VAT

About us Top 20 UK Accountancy Firm Fastest Growing amongst the top 20 56 Partners /500+ Employees ISO 9001 accredited 7 offices in and around London Established in 1923

Top 20 UK Accountancy Firm

Fastest Growing amongst the top 20

56 Partners /500+ Employees

ISO 9001 accredited

7 offices in and around London

Established in 1923

Kingston Smith Rated as “Accountant of the year” for the PLUS market. Amongst the top accountants for AIM listed companies Diverse range of services via associated companies International presence in over 50 countries through KSi ( www.ksi.org ) Expertise in varied industry sectors

Rated as “Accountant of the year” for the PLUS market.

Amongst the top accountants for AIM listed companies

Diverse range of services via associated companies

International presence in over 50 countries through KSi ( www.ksi.org )

Expertise in varied industry sectors

Indian clients Have worked with some of the well recognized Indian clients, majority of them from the Technology sector. Dealing with Indian clients for the last 20 years. Client base consists of large business houses as well as the SME and small start up firms. Have developed a niche India practice, where we have people, who understand both India and UK, to bring the best to you.

Have worked with some of the well recognized Indian clients, majority of them from the Technology sector.

Dealing with Indian clients for the last 20 years.

Client base consists of large business houses as well as the SME and small start up firms.

Have developed a niche India practice, where we have people, who understand both India and UK, to bring the best to you.

BRANCH VS SUBSIDIARY?

BRANCH VS SUBSIDIARY?

Branch vs Subsidiary BRANCH Same legal entity as non-UK company Non-UK company liable under contracts Subject to UK Corporation Tax on UK “Permanent Establishment” profits SUBSIDIARY Separate legal entity Liability ring fenced in the UK within subsidiary Subject to UK Corporation Tax on Worldwide Income

BRANCH

Same legal entity as non-UK company

Non-UK company liable under contracts

Subject to UK Corporation Tax on UK “Permanent Establishment” profits

SUBSIDIARY

Separate legal entity

Liability ring fenced in the UK within subsidiary

Subject to UK Corporation Tax on Worldwide Income

Branch vs Subsidiary BRANCH Taxed at 28% UK Branch profits can qualify as “IT enabled export” income for purposes of Indian Corporation Tax exemptions Double tax relief given in India for UK Corporation Tax paid SUBSIDIARY Taxed at 28% Dividends paid to Indian company cannot qualify as “IT enabled export” income No double tax relief for UK Corporation Tax paid (effective tax at approx 50%)

BRANCH

Taxed at 28%

UK Branch profits can qualify as “IT enabled export” income for purposes of Indian Corporation Tax exemptions

Double tax relief given in India for UK Corporation Tax paid

SUBSIDIARY

Taxed at 28%

Dividends paid to Indian company cannot qualify as “IT enabled export” income

No double tax relief for UK Corporation Tax paid (effective tax at approx 50%)

Branch vs Subsidiary BRANCH No withholding tax on profits paid from UK 20% withholding tax on interest– can be reduced under certain tax treaties Interest and royalties to “parent” company not tax deductible SUBSIDIARY No withholding tax on Dividends paid Same Interest and Royalties to “parent” deductible if “arm’s length”

BRANCH

No withholding tax on profits paid from UK

20% withholding tax on interest– can be reduced under certain tax treaties

Interest and royalties to “parent” company not tax deductible

SUBSIDIARY

No withholding tax on Dividends paid

Same

Interest and Royalties to “parent” deductible if “arm’s length”

Branch vs Subsidiary BRANCH No statutory audit requirement Must file non-UK (audited) financial statements on public record Can be perceived to be a “weak” presence in the UK SUBSIDIARY Statutory audit required if criteria met Must file UK GAAP financial statements of subsidiary on public record A “strong” presence in the UK

BRANCH

No statutory audit requirement

Must file non-UK (audited) financial statements on public record

Can be perceived to be a “weak” presence in the UK

SUBSIDIARY

Statutory audit required if criteria met

Must file UK GAAP financial statements of subsidiary on public record

A “strong” presence in the UK

Branch vs Subsidiary BRANCH Can be time consuming to register Must have at least one UK based representative SUBSIDIARY Simple to incorporate Must have at least one director (not necessarily UK based)

BRANCH

Can be time consuming to register

Must have at least one UK based representative

SUBSIDIARY

Simple to incorporate

Must have at least one director (not necessarily UK based)

Branch vs Sub - Conclusion Branches double tax relief available do not ring-fence UK liabilities must disclose non-UK financial statements do not need a separate audit perceived to be a “weaker” UK presence Subsidiaries Could be double tax relief problems need UK GAAP financial statement may need to be audited (= additional cost) simple to incorporate perceived to be a “stronger” UK presence

Branches

double tax relief available

do not ring-fence UK liabilities

must disclose non-UK financial statements

do not need a separate audit

perceived to be a “weaker” UK presence

Subsidiaries

Could be double tax relief problems

need UK GAAP financial statement

may need to be audited (= additional cost)

simple to incorporate

perceived to be a “stronger” UK presence

EMPLOYMENT TAXES

EMPLOYMENT TAXES

Employment Taxes UK Taxes on employment income: Income Tax at 0%, 20% and 40% Employee’s Social Security at 0%, 11% and 1% Employer’s Social Security at 0% and 12.8%

UK Taxes on employment income:

Income Tax at 0%, 20% and 40%

Employee’s Social Security at 0%, 11% and 1%

Employer’s Social Security at 0% and 12.8%

Employment Taxes Taxation of an individual earning £40,000 per annum… £ Salary 40,000 Income Tax (6,800) Social Security (3,800) Net Salary 29,400 … plus Employer’s Social Security of £4,400 Therefore, total cost to the employer of £44,400

Taxation of an individual earning £40,000 per annum…

£

Salary 40,000

Income Tax (6,800)

Social Security (3,800)

Net Salary 29,400

… plus Employer’s Social Security of £4,400

Therefore, total cost to the employer of £44,400

Employment Taxes - Planning Social Security Exemption For individuals on secondment from India to the UK, there is no liability to Social Security for the first 52 weeks This is an immediate saving of £3,800 for the employee and £4,400 for the employer (based on previous example)

Social Security Exemption

For individuals on secondment from India to the UK, there is no liability to Social Security for the first 52 weeks

This is an immediate saving of £3,800 for the employee and £4,400 for the employer (based on previous example)

Employment Taxes - Planning Claim for overseas work days If employee spends some time working outside of the UK, the salary corresponding to the proportion of work days spent outside of the UK can be excluded provided that it is not remitted to the UK

Claim for overseas work days

If employee spends some time working outside of the UK, the salary corresponding to the proportion of work days spent outside of the UK can be excluded provided that it is not remitted to the UK

Employment Taxes - Planning Example – an employee earning £40,000 but spending 2 days a week (i.e. 40%) working in various European countries… £ Salary 40,000 (only £24,000 taxable) Income Tax (4,800) Social Security ( - ) (52 week exemption) Net Salary 35,200 This represents a £5,800 tax saving for the employee and a £4,400 saving for the employer

Example – an employee earning £40,000 but spending 2 days a week (i.e. 40%) working in various European countries…

£

Salary 40,000 (only £24,000 taxable)

Income Tax (4,800)

Social Security ( - ) (52 week exemption)

Net Salary 35,200

This represents a £5,800 tax saving for the employee and a £4,400 saving for the employer

Employment Taxes - Planning Claim for living expenses If an employee is seconded temporarily to the UK and the secondment is expected to last for less than 24 months then certain living expenses are tax deductible

Claim for living expenses

If an employee is seconded temporarily to the UK and the secondment is expected to last for less than 24 months then certain living expenses are tax deductible

Employment Taxes - Planning Tax Deductible Living Expenses: Accommodation costs Subsistence (3 meals a day, 7 days a week) Council Tax (approx. £150/month) Utility Bills (Gas, Electricty and Water rates) Home to Office travel costs Non Tax Deductible Expenses: School fees Family costs Home telephone, broadband and cable TV

Tax Deductible Living Expenses:

Accommodation costs

Subsistence (3 meals a day, 7 days a week)

Council Tax (approx. £150/month)

Utility Bills (Gas, Electricty and Water rates)

Home to Office travel costs

Non Tax Deductible Expenses:

School fees

Family costs

Home telephone, broadband and cable TV

Employment Taxes - Planning Example – an employee earning £40,000 is seconded to set up a UK office which is expected to take 18 months. Living in London, he spends around £1,800 per month on deductible expenses. He also spends 2 days a week travelling to the European offices.

Example – an employee earning £40,000 is seconded to set up a UK office which is expected to take 18 months. Living in London, he spends around £1,800 per month on deductible expenses.

He also spends 2 days a week travelling to the European offices.

Employment Taxes - Planning The taxable salary is reduced by 40% for overseas workdays and then by a further £21,600 for qualifying living expenses: £ Salary 40,000 (only £2,400 taxable) Income Tax (480) Social Security ( - ) (52 week exemption) Net Salary 39,520 This represents a £10,120 tax saving for the employee and a £4,400 saving for the employer

The taxable salary is reduced by 40% for overseas workdays and then by a further £21,600 for qualifying living expenses:

£

Salary 40,000 (only £2,400 taxable)

Income Tax (480)

Social Security ( - ) (52 week exemption)

Net Salary 39,520

This represents a £10,120 tax saving for the employee and a £4,400 saving for the employer

Employment Taxes - Planning Other issues: Tax Equalisation to pass cost savings to the employer but don’t forget immigration issues Share Options Indian salaries Watch out for Americans!

Other issues:

Tax Equalisation to pass cost savings to the employer but don’t forget immigration issues

Share Options

Indian salaries

Watch out for Americans!

CORPORATION TAX

CORPORATION TAX

Corporation Tax Profits subject to Corporation Tax as follows: Up to £300,000 – at 21% Between £300,000 and £1,500,000 – at 29.75% Above £1,500,000 – at 28% Watch out for groups as this will reduce above profit slabs

Profits subject to Corporation Tax as follows:

Up to £300,000 – at 21%

Between £300,000 and £1,500,000 – at 29.75%

Above £1,500,000 – at 28%

Watch out for groups as this will reduce above profit slabs

Corporation Tax Non-tax deductible expenses: Client entertaining Capital Acquisitions (i.e. cost of cars, equipment, etc…) Depreciation Extra Tax deductible expenses: Capital Allowances (Tax Depreciation) Research & Development relief Stock Option Scheme deductions

Non-tax deductible expenses:

Client entertaining

Capital Acquisitions (i.e. cost of cars, equipment, etc…)

Depreciation

Extra Tax deductible expenses:

Capital Allowances (Tax Depreciation)

Research & Development relief

Stock Option Scheme deductions

Corporation Tax How do you calculate UK profits? It depends… Are you providing services from the UK to India or the end client?

How do you calculate UK profits?

It depends…

Are you providing services from the UK to India or the end client?

Corporation Tax UK Branch as Service Provider to India India UK Indian Company UK Branch Provides Services UK Client Provides Services

UK Branch as Service Provider to India

Corporation Tax UK Branch as Service Provider to UK Client India UK Indian Company UK Branch Provides Services UK Client Provides Services Cost Allocation

UK Branch as Service Provider to UK Client

Corporation Tax Transfer Pricing Rules will apply: If providing service to India – consider “Cost-Plus” model If providing service to Client – consider “Comparable Uncontrolled Price” model Seek advice early on!

Transfer Pricing Rules will apply:

If providing service to India – consider “Cost-Plus” model

If providing service to Client – consider “Comparable Uncontrolled Price” model

Seek advice early on!

VALUE ADDED TAX

VALUE ADDED TAX

Value Added Tax (“VAT”) VAT is charged at 15% on certain supplies made in the UK This means that most UK businesses charge VAT on their sales invoices and incur VAT on their costs The net of VAT charged and incurred is payable/recoverable from HM Revenue & Customs

VAT is charged at 15% on certain supplies made in the UK

This means that most UK businesses charge VAT on their sales invoices and incur VAT on their costs

The net of VAT charged and incurred is payable/recoverable from HM Revenue & Customs

Value Added Tax (“VAT”) It is very important to understand your liability for VAT in the UK as failure to charge VAT when due can result in large penalties and liabilities Similar, failure to register for VAT when eligible to register can result in non-recovery of VAT As always, take advice early on

It is very important to understand your liability for VAT in the UK as failure to charge VAT when due can result in large penalties and liabilities

Similar, failure to register for VAT when eligible to register can result in non-recovery of VAT

As always, take advice early on

Contact Details Tim Stovold Chandru Iyer Partner International BDM [email_address] [email_address] Kingston Smith LLP Devonshire House 60 Goswell Road London EC1M 7AD Telephone +44 20 7566 4000 Fax +44 20 7566 4010

Tim Stovold Chandru Iyer

Partner International BDM

[email_address] [email_address]

Kingston Smith LLP

Devonshire House

60 Goswell Road

London EC1M 7AD

Telephone +44 20 7566 4000

Fax +44 20 7566 4010